Brad DeLong Is Scaring Me

First he says this:

Central Banking in Practice

So, today the monetary base in the North Atlantic economies is 7% higher than it was yesterday--an annualized growth rate of 2100% per year.

This is indeed a significant liquidity event...

That's scary enough. But then he comes with this:

The Fed Is Buying Mortgage-Backed Securities? Hoisted from Comments

PSP: Hoisted from Comments http://delong.typepad.com/sdj/2007/08/central-banking.html#comment-79038528:

Fri morning's N.Y. Times online edition:

The E.C.B. injected another 61 billion euros ($84 billion) into the banking system, after providing 95 billion euros the day before. The Federal Reserve today added $19 billion to the system through the purchase of mortgage-backed securities, then $16 billion in three-day repurchase agreements. The Fed also added money on Thursday.

I thought the Fed only bought and sold Federal debt. This says it is intervening directly in the mortgage-backed securities market. Is this as unusual as I think it is?

Yes.

I'm getting freaked out. But then the kind professor provides some reassurance:

John Berry of Bloomberg says what's what about the Federal Reserve:

The amount of cash the Federal Reserve injected into the U.S. banking system on Aug. 9 and 10, and its importance, have been widely misunderstood. Each day banks are open, the people working at the New York Federal Reserve Bank's ninth floor Open Market Desk do the same thing: supply enough money to the U.S. banking system to keep the overnight lending rate close to the Fed's 5.25 percent target. Aug. 9 and 10 were different only in degree, and in the attention the Fed called to the action in a statement issued on the latter day.

There was no hint of an interest rate cut -- nor is there likely to be unless conditions in world financial markets worsen considerably and threaten continued economic growth in the U.S.... The desk added $24 billion on Thursday and $38 billion on Friday. However, just stating those figures tends to exaggerate their importance. For instance, as recently as Aug. 2, $17 billion had been added and everyone yawned. Furthermore, by the end of the yesterday essentially all the additional liquidity injected to calm markets had been withdrawn....

Routinely, a substantial amount of cash is added each Thursday for a 14-day period. Half of last Thursday's injection was of that type. The other $12 billion was left in the banking system just overnight, that is, the New York Fed returned the securities on Friday and took back the cash.... The lending rate jumped around, ranging from zero to just over 6 percent, as the desk found it necessary to step in three times, adding $19 billion at 8:25 a.m., another $16 billion at 10:55 a.m. and finally $3 billion at 1:50 p.m., according to the New York Fed. All that $38 billion was returned to the Fed yesterday.

With markets under far less pressure, that money was replaced by new agreements of just $2 billion, much less than the usual daily total....

Ahhh.... that's better. Everything's gonna be alright.

(isn't it?)